I have often written and commented on the importance of understanding the cyclical nature
of the currency markets. That often sees micro trends unfold or reverse from one quarter to
the next. Over the years that has been most evident with the dollar. However, it is certainly
not a consistent theme by any means. Take this year for example, where the dollar has not
always gyrated strictly on a quarter by quarter basis.
If you look at the simple chart of the dollar’s performance this year you can see how that
has played out. This chart tracks the performance of the USD index which is a broad based
measure of the US currency’s performance as weighted against a basket of counterpart
currencies. The main one is the EUR, with around a 57% weighting within that basket. The
other major components within that basket are the JPY, CHF, GBP and CAD.
So, as you can see the USD index rose in the first quarter following a modest sell off in the
final quarter of 2018. The rebound in Q1 continued into the second quarter. That was then
followed by a sharp relapse right at the end of Q2. The move lower at the end of Q2
culminated with a brief break below the 200 day moving average, right at the end of June.
That moving average is identified by the yellow line on the chart. The index then rebounded
again, breaking back above the 200 DMA, rising steadily throughout Q3.
As you can see, the peak of the move in Q3 came right at the end of September when the
index briefly lifted above 99, peaking exactly on 30th of the month. Uncanny perhaps? Well,
since then the index has fallen back quite sharply as Q4 has unfolded. The price briefly
dipped below the 200 day moving average again last month, only to rebound back above it
again. However, on Friday the price dropped below it again, to close for the week below the
200 DMA for a second time. The close last Friday was set at 97.24. The 200 day moving
average is today, largely unchanged from where it stood on Friday and as of this morning
stands at 97.46.
So, with just a little under two months to go before the year is out, you can see that the
scene is now set for the USD index to continue to lose ground into the end of the final
quarter of 2019. Whilst that looks increasingly likely, it is not at all guaranteed. This is largely
due to the fundamental reasons why the USD has been strong this year- because the
European economy is structurally so weak. The latest EU PMI data this morning, whilst
slightly better than expected, is still very much endorsing that point.
However, what I am trying to convey here is the clear evidence that once again the dollar’s
performance over any one given year is invariably characterized by these quarterly shifts in
the price action. As I earlier noted this is a phenomenon that I can safely say has
characterized USD trading over each and any year for as long as I can remember, and that is
an awful long time! What is also clear, is that unless anything fundamentally changes in
Europe between now and the New Year, then the lower the USD falls back towards the end
of December, the greater the chances of a Q1 rebound in 2020.
Important economic releases and events due This Week
05/11- 3.30am Australia- RBA Monetary Policy Decision
(Consensus- 0.75% Benchmark Rate Unchanged)
05/11- 9.30am UK October Services PMI
05/11- 3.00pm US October Non Manufacturing ISM Index
05/11- 9.45pm New Zealand Q3 Unemployment Report
06/11- 10am Eurozone September Retail Sales
07/11- 1.30am China October Foreign Currency Reserves
07/11- 8.00am Swiss October Foreign Currency Reserves
07/11- 9.00am ECB publishes Economic Bulletin
07/11- 10.00am EU Commission Publishes Economic Forecasts
07/11- 12.00pm Bank of England Monetary Policy Decision
(Consensus- 0.75% Base Rate Unchanged)
07/11- 8.00pm US September Consumer Credit
07/11- 11.50pm Japan October Foreign Currency Reserves
08/11- 3.00pm US University of Michigan November Consumer
Sentiment Index